Lawrence Gosling, editorial director at Incisive Media, asks whether the rise of 'clean' fund pricing undermines the value of active management...
I am indebted to a columnist on the Evening Standard for digging up the following story:
The great writer George Bernard Shaw once asked a pretty girl if she would sleep with him for £1,000. She blushed but intimated she'd consider it. “How about five shillings (25p)?” asked Shaw. "What do you take me for? A prostitute?” replied the woman. Said Shaw: "We have established that already, we're just haggling over the price.”
What has this got to do with our industry? Fund pricing. The past 12 months have all been about 'clean' and 'super clean', which are descriptions for funds that are essentially the same but offered at different prices. We are just haggling over the price.
Are 'clean' funds undermining the value of active management?
The ‘virtue’ of fund management has been established, or at least compromised. It feels like the argument has been lost as to the value of fund management, just to make space in the value chain for the distributing platform or advice. The discussion should not be about price for active management, it should be about what is a reasonable price for the services of a platform.
We are only in this downward spiral because platforms are demanding their slice of the pie, but is that slice as important as the actual investment expertise? We are only talking about ‘shelf space’, not real influence over the flow of funds.
So, on a price of 65bps or 75bps, the value of a fund manager is half what it was a year ago. Are you telling me Neil Woodford is worth half what he was a year ago?
I doubt it, and so does Invesco Perpetual. The group would happily ‘pay’ him the full fat 150bps if they thought they could keep him. At what point does the industry stand up for itself and argue 1.5% is a fair and appropriate price for consistent active management?
The underlying issue
The argument about this so-called headline price obscures the real issue about what the actual price is and what investors receive for that price.
At Investment Week’s Fund Management Summit two weeks ago, Threadneedle’s Campbell Fleming articulated this point very well.
Having signed off the half-year accounts on a Threadneedle equity income fund, he said the cost to the investor was 1.62% and the return in excess of 10%, with the relevant index up about 4% over the same six-month period.
In this scenario, what does a headline clean or super clean share class cost of 65bps or 75 bps really mean? That number, as a measure of actual cost account, is less than half the final figure in the Threadneedle case. But that final figure cannot give you any indication of what the return was.
So, in terms of making an informed decision about whether a fund is a ‘good’ one or a ‘bad’ one, that super clean price is useless. Yet, if you believe the consumerists, the new pricing regime is better all round.
We are even further away from making investors understand what real fund management is actually worth.
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